MoneySense Magazine, November 2010
Avoiding the family feud
No parents intend to leave their kids an emotional minefield that tears brothers and sisters apart. But if you’re not careful when you pass down the family home or cottage, that’s exactly what will happen.
This article was first published in the November 2010 issue of MoneySense.
Ask each of the four Carson brothers where they spent the best times of their lives, and they’ll say at the 1938 family lake house on the glistening shores of Lake Huron in Ontario.
That’s where Jim, Rob, Matthew and Jason spent long, lazy summer days swimming and looking for fat, juicy worms so they could bait their heirloom fishing rods in preparation for hours of fun catching bass, whitefish and rainbow trout. On the drive up every Canada Day weekend in the wood-paneled station wagon, the whole family would stop in town to buy groceries at the small local market before finally arriving at the cottage, ready for endless weeks of summer fun.
But these days the Carson brothers (we’ve changed their names to protect privacy) don’t talk to each other anymore—and the cottage that was once their dream has turned into a living nightmare. When the boys’ parents, Hugh and Kathleen, passed away four years ago, they did what they thought was the right thing. That is, they left the cottage to all four boys to share as they saw fit, believing the boys would work out an arrangement that would please everyone. “I think they thought they were doing us a favour,” says Jason, 47, the youngest. “But I also think they didn’t want to be seen playing favourites, and they just avoided the whole topic of inheritance while they were still alive.”
At first, the Carson brothers tried their best to share cottage expenses and allocate the summer weeks at the cottage fairly. Jim, 56 and the eldest, would bill each of the brothers $3,000 a year for expenses, property taxes and maintenance. But that didn’t work for long. Jim, who lived a short 45-minute drive from the cottage, used it as much as he could every summer, but Rob and Matthew lived near Ottawa and drove to the cottage only a couple of weekends a year. Jason, who lives in Calgary with his second wife and two daughters, hasn’t come out to Ontario to use the cottage once since his parents died. So last year, after talking it over with his wife, he outright refused to pay his share of expenses for the cottage and asked his brothers to buy him out.
It all went downhill from there. The two brothers in Ottawa couldn’t afford to buy out Jason, and Jim told Jason point blank that he wouldn’t. Jim reasoned that he wasn’t stopping Jason from using the cottage, so why should the fact that Jason happened to live so far away cost him money? “That made me really mad and I just snapped,” says Jason. “I’m not going to allow him to treat me and my family that way.”
The result? A nasty court battle that promises to go on for years. By neglecting to draw up a proper succession plan, their parents have ruined the close relationship the boys shared growing up. “I know my parents tried to do the right thing but they probably should have just sold the cottage before they died and told us that was what they were going to do,” says Jason. “We wouldn’t have liked it in the beginning but we would have all eventually accepted it. Now there’s no turning back.”
The Carsons’ story is as sad as it is common. Most lawyers could write a book about the family feuds they’ve witnessed because of poorly thought out succession plans (and several have). Often, the parents are trying to be fair, but don’t consider how their plans will work on a practical level. Other times, the parents focus on tax issues, and what works best for their own finances, without really considering the kids’ needs at all. In some cases, parents ignore the issue altogether, because they just don’t want to
deal with it.
Whatever the reason, rather than leaving their kids a property that enriches their lives, parents can inadvertently leave an emotional minefield that causes years of strife. “When the parents are gone, all the unresolved emotional issues from childhood come into play,” says Brad Klontz, a financial psychologist based in Hawaii and co-author of Mind over Money. “Lawyers try to tackle the issues by using a logical approach. But it’s 90% emotional. The siblings will resort to primitive ways of dealing with the unpleasantness and either fight, freeze or run away, then nothing gets resolved for years.”
If you’re a parent who wants to avoid causing such a family rift—or you’re a son or daughter who fears that such a fight could be heading your way, read on. By following the tips below, you can ensure that your family never becomes embroiled in a nasty feud.
Talk it through
While it would have been difficult to predict the Carsons’ family feud, you would have thought that an all-out war in Gord Gallant’s family was a sure thing. Gallant, now a 47-year-old assistant construction supervisor in Erin, Ont., was the youngest of 15 children born into a French-Canadian family in Charlottetown, and his parents left him everything. His 14 siblings didn’t get a dime. Yet not one of them has uttered a word of complaint. The reason? The inheritance plan, fair or not, was in place from the day the first child was born, and everyone in the family knew exactly what it was. “It was part of the French Canadian tradition in our family to leave everything to the youngest child,” says Gallant. “Well, I was 15 when my parents died and I was the youngest. I was the lucky one who inherited everything.”
Gallant says that at the time of his parents’ death, all of the family property, which included the family home as well as a lobster business and its valuable accompanying quota, were put in a family trust for Gallant until he turned 21. In the meantime, he lived in the family home and his older sister and brother-in-law took care of him. “I sold the home to my sister, and the lobster business and quota to an older brother, who was the real fisherman in the family, as soon as I turned 21,” says Gallant. “They paid me fair market value and we’re still close today.”
It’s hard to believe that all this transpired so amicably, especially since Gallant didn’t exactly put the money he got from his brother and sister to good use. “I wasted a lot of it on the things that 21-year-olds do—wine, women and song,” Gallant admits. “But through the whole thing, my family and I were closer than ever. We still vacation together all the time today and I go out to P.E.I. every chance I get.”
Ruth Hayden, a financial educator and author in St. Paul, Minn., says that the Gallant family estate plan worked well because the kids knew about it years in advance, so they had time to get used to it. The open communication from the parents about what would happen gave the kids a lifetime to adjust their expectations and ask questions about why the property was being split up the way it was. “The key is that parents need to be open and honest about their intentions—even if they have to deal with unhappiness now,” Hayden says.
Don’t settle scores with a will
It’s almost always a mistake to favour one child over another when you’re leaving property, even if you’re trying to correct past financial injustices. If you really feel that one child deserves something extra, rather than doing it in your will, consider doing it while you’re alive.
That means that if you paid for medical school for your daughter and didn’t give your son anything for his schooling, then you should give him a cash gift during your lifetime—maybe for the down payment on his home when he buys one. Or, if one child took care of you for 20 years in the family home and the others didn’t help at all, then consider giving her a direct payment for the time she spent looking after you—and telling your other children at that time why you’re doing it. But don’t finger children out in the will for special consideration. “From my experience, most special gifts left in wills lead to hard feelings among the siblings,” says Ed Olkovich, a wills and estate lawyer in Toronto and author of Estate to the Heart.
If you’re dead set on favouring one or more of your children in your will, at least let your kids know about your decision well in advance. As Gallant found, when the whole family knows what to expect, that can go a long way toward heading off hurt feelings. But don’t fool yourself—when you first propose the idea, you could be in for a rough ride. “Even just discussing these decisions may cause a lot of hurt and anger, but it needs to be done because it gives the kids a chance to get some answers to their questions,” says Thornhill, Ont., lawyer Barry Fish, co-author of The Family Fight: Planning to Avoid It. “They may not like the answer, but they’ll at least understand why you did what you did.”
Include a note to the kids
To make absolutely sure there are no misunderstandings, it’s a good idea to write a brief letter to your children, to be read before the will. The purpose of the note is two-fold. First, you want to explain to your kids why you made the decisions you did. Second, you want to let your kids know that no matter what those decisions were, you loved them all equally.
Hayden has helped several clients write up what she calls a “statement of intention,” and she says it should read as follows: “We love you Kenny, Bobby, Johnny and Marie. We love you all equally and this is why we are doing what we do.” Hayden points out that the note shouldn’t favour anyone and that often fairness is really about quantifying the love. “If parents say from the beginning that they love the children equally, it goes a long way towards easing things through the process.” And don’t complicate matters by trying to include grandchildren in the will. “The only way to do this fairly is to have the grandkids’ share come out of the parents’ share,” says Hayden. “Deal with your children only and you will mitigate any feuds.”
Taxes come second
A common mistake when leaving property is to get so caught up in trying to minimize capital gains taxes, that your children’s emotional and financial needs get forgotten. Most middle-class Canadians will get only one tax-free capital gain on property in their lifetime, and that’s on their main residence. There are dozens of strategies for avoiding paying capital gains taxes when you leave your cottage or other family property to the kids, but most of them don’t hold water.
It’s important to understand this, because if you put too much emphasis on schemes to avoid taxes, you can end up making poor decisions. Not only can you let tax issues cloud simple and fair solutions to leaving property, most of them won’t work out the way you hoped anyway. “Tax considerations should not be the major reason why you leave property to certain family members, or for that matter, why you change title and gift certain properties while you’re still alive,” says Kathy Munro, a tax partner with PricewaterhouseCoopers in Toronto. “You absolutely want to minimize the taxes paid when passing on the family cottage—and there are some legitimate ways of doing that. But it’s not that easy.”
For instance, Munro says you can’t simply add a child’s name to the title while you’re still alive, or gift your cottage to one of your children and expect to pay no capital gains tax. Such strategies can trigger full taxation and put the family in a position where they may even have to sell the cottage to meet tax obligations. (For more on strategies to slash capital gains taxes, see Top 5 tax myths about leaving property)
Cathy Buchanan, 42, of Richmond Hill, Ont., says that for years her dad considered adding her name and those of her two brothers, Mike and Jon, to his cottage’s title. But after getting some professional tax advice, he decided against it. “My dad wanted to do the right thing, but he was getting conflicting advice from friends and neighbours,” says Buchanan. “He chose to leave things alone for now and look at things again when he’s a little older.”
Buchanan says the cottage has been in the family for three generations and her dad would like to keep it that way. But rather than trying to execute a complicated tax maneuver, they are considering a simple purchase when her dad gets too old to enjoy it. “My brother Mike and I have said that when my dad is ready to let go of the cottage, we will buy Jon out at fair market value,” she says.
Pay taxes with life insurance
While you should generally avoid complicated tax schemes, you shouldn’t forget about the impact of capital gains taxes altogether. The tax bill on capital gains can indeed be huge, and you need to make sure your kids can afford it. For instance, if you originally bought your cottage for $200,000 and it’s worth $500,000 when you die, your kids could end up being forced to pay out as much as $75,000 in taxes when they inherit the cottage.
A great way to cover that cost is to take out a last-to-die life insurance policy for you and your spouse. The money from the policy will then be used to pay the capital gains taxes due at the time of death. In some cases, children who stand to inherit the property may even be willing to pay the premium on the policy. A $500,000 last-to-die policy for two 65-year-olds would cost about $6,700 a year in premiums.
The right life insurance policy can be the solution in other situations too. For instance, if you’re in a second marriage and you have grown children from the first marriage that you’d like to bequeath something to, you could leave them a set amount of money in the form of a life insurance policy. It’s a great way to guarantee that your current family’s lifestyle won’t be disrupted, without forgetting the kids you had with your first wife or husband. “The more options you bring to the table in these kinds of situations, the better,” says Douglas Forer, senior tax partner with McLennan Ross in Edmonton, Alta. “Substantial cash from a life insurance policy goes a long way towards maintaining peace between the two families when the will is read.”
Sell the cottage when you stop using it
Once you reach your 80s you may find you’re not really up to the long drive up to the cottage any more. At that point, you may want to confer with the kids to see whether they actually want it. If not, the simplest thing to do is to sell it yourself, use the proceeds to pay the capital gains taxes and leave the rest of the money to the kids.
That’s what Barbara Wickens’ parents did. “My parents knew by age 80 that they didn’t want to keep the family cottage anymore,” says Wickens, a freelance editor, writer and co-author of Now What? A Practical Guide to Dealing With Aging, Illness and Death. “They made no secret of it, letting both my sister and me know that they had no intentions of passing it down to us. They paid their capital gains taxes and let us get on with our lives. I’m thankful for that today.”
Cash can be the best gift of all
That brings us to what may be the most controversial advice of all when leaving property: don’t do it. If there is more than one child, coming up with a plan that’s flexible enough to deal with life’s twists and turns while keeping everyone happy is almost impossible.
Even in the most straightforward situations, unforeseen problems can quickly emerge. “I have one client who left the cottage to her son and daughter as co-owners,” says Fish. “The daughter used the cottage every July and her brother every August.” The children got along well, and everything went smoothly as first. “But the daughter’s family was so messy that the son’s family spent the first few days in August cleaning up the cottage after them. After a few summers of doing this, they eventually sold the place and each bought their own cottage where their families could relax and behave as they liked.”
The truth is that asking several people to share a cottage or other property is almost always asking for trouble. If it wasn’t an inheritance, few people would choose to co-own a property with their siblings. “That’s why I tell my clients that the way to abort any family feuds is to envision everything being sold and transferring straight cash to your kids,” Olkovich says. He feels that leaving cash is almost always the fairest thing to do. “When those kids sit at the table around me as a I read their parents’ will, they’re all looking for one thing,” says Olkovich. “They want to be reassured that mom and dad loved them just as much as brother Sam and sister Susie. Nothing says that as clearly as an equal cash payout for everyone.”
Remember that by the time you’re gone, your kids will likely have their own families, their own homes and in many cases, their own cottages. By that point, the cottage or family home may not mean as much to them as you think.
That was the case with two brothers we’ll call Diego and Maurice. All the neighbours thought they would get into a huge fight over the family home on a tony street in suburban Toronto when their mother passed away two years ago. Instead the boys, who are now in their 50s with families of their own, were interested in keeping very little from their parents’ estate. Diego drove off with his dad’s antique Cadillac while Maurice came out of the house with a small cardboard box holding a few pieces of his mother’s heirloom jewelry. Then they instructed the real estate agent to sell the house and dispose of everything else in it.
“Keep perspective,” says Olkovich. “Your kids aren’t teens anymore. Many are probably on the cusp of retirement themselves. They don’t really need anything from the estate. More than anything, they just want to know they were loved equally. That’s the real legacy you should be leaving them.”
MoneySense Magazine, November 2010